Life

Joseph Schumpeter was born in Moravia (then a part of the Austro-Hungarian Empire, now in the Czech Republic). His father, a clothing manufacturer, was killed when Schumpeter was 4 years old. Several years later his mother embarked on a second marriage with a senior Austrian general. Schumpeter was a gifted student, reading law and economics at the University of Vienna before taking a doctorate in law which was awarded in 1906.

Schumpeter disapproved of Austrian involvement in the First World War, and soon became interested in the question of post-war economic reconstruction. In 1919, after his country’s defeat, his academic career was interrupted by a brief appointment as Minister of Finance in the Austrian government. From 1920 to 1924 he served as president of a regional bank – an appointment which ended in disaster for Schumpeter when the company collapsed. In 1925 Schumpeter moved to Germany, where he was a Professor in the University of Bonn. He also gave lectures at Harvard University, and he moved there permanently when the Nazis took power in Germany.

Works

Although he was a prolific writer on economics, Schumpeter’s most famous work, Capitalism, Socialism and Democracy (1942) had a wider relevance. Schumpeter agreed with Karl Marx in thinking that capitalism was doomed, but he did not believe that the fatal blow would be delivered by a proletarian uprising. Rather, he saw intellectuals as the main enemy of capitalism. The material success of capitalism would provoke a reaction against free-market values, so that entrepreneurial initiative would eventually be smothered by the action of (moderate) left-wing governments. Ironically, if capitalism was less successful as an economic system it would be more likely to survive. One of its by-products is better education and a higher rate of literacy, facilitating the spread of ideas which are hostile to free enterprise.

Schumpeter’s view of a socialist future is enigmatic. He shows some sympathy for socialist ideas, and concedes that collectivism could result in the satisfaction of genuine needs. On the other hand, he had a profound admiration for the entrepreneurial spirit. In Capitalism, Socialism and Democracy he popularized the term ‘creative destruction’ to summarise the impact of entrepreneurs. By undermining longer established and complacent firms, entrepreneurs ensured economic progress.

Schumpeter also contributed to political discussion through his ‘democratic elitism’ (for discussion, see Chapter 3). From his (pessimistic) perspective, most democratic thinking was based on an over-optimistic view of the electorate. In reality, not many voters have the intelligence or motivation to understand political issues. As such, it is probably a good thing that they do not exercise much direct influence over the political process. Instead, this is dominated by parties which are led by competing elites. At election time, voters choose between rival groups of people who promise to govern in their interest. At best, then, democratic government was rule for, not by, the people. Some critics have argued that Schumpeter’s argument should not be counted as democratic at all, because it does not specify mechanisms for holding governments to account. However, it seems that Schumpeter was merely describing democracy as he saw it, rather than trying to justify other kinds of regime like monarchies.

Schumpeter’s view of politics was clearly influenced by his own practical experiences, but also by his background in economics. In casting a vote, individuals are behaving like market actors, plumping for the ‘product’ which seems to suit their interests but having little part in the development of the alternatives on offer. It can be argued that this view of democracy has become increasingly accurate since Schumpeter’s death. By the mid-1970s, states like the UK also seemed to offer verification of his predictions about the triumph of ‘socialism’ – or, at least, of a capitalist system which was subjected to ever-increasing interference and regulation by the state. Despite the strong revival of free-market ideas since that time, Schumpeter’s prophecies could still come true; they certainly seem more plausible than Marx’s visions. However, Schumpeter himself remains a fairly obscure figure outside academia, compared to John Maynard Keynes who was an almost exact contemporary. One key difference between the two is that Keynes was a convinced liberal who retained his faith in freedom (even if his some of his critics saw fit to doubt his lifelong commitment). By contrast Schumpeter, with his first-hand experience of continental Europe between the Wars, strikes the reader as a much more cynical observer of human affairs.

Further reading

E.G Carayannis and C. Ziemnowicz, C., Rediscovering Schumpeter, Palgrave Macmillan, 2007.

Thomas McCraw, Prophet of Innovation: Joseph Schumpeter and Creative Destruction, Belknap Press, 2007.